Medicaid spending is higher than expected. The economy is cooling. Last year's tax cuts and the decision to move billions of general-purpose revenue into highways will dramatically shrink the pool of money available for budget writers in next year’s legislative session.

Fears are mounting that lawmakers will have to cut spending deeply, especially if, as in most recent years, they don’t want to heavily dip into the state’s rainy day fund or raise fees. Any tax increase is almost certainly off the table in a solidly conservative Legislature.

“It is going to be a very challenging session,” said Texas Taxpayers and Research Association president Dale Craymer, a budget watcher who advised former Govs. Ann Richards and George W. Bush. “There will clearly be budget cuts.”

Dale Craymer, president of the Texas Taxpayers and Research Association

(Addison Studios)

Complicating the picture is a mounting pile of IOUs, such as a hole in the Medicaid budget of between $1.3 billion and $1.6 billion in state funds. State agencies are filing urgent requests for funds, too.

They include the Teacher Retirement System’s need for $1.35 billion to cover the costs of retired teachers’ health care in the next two-year cycle; and the Department of Public Safety’s request for nearly $300 million more for border security in 2018-19. It would bring state spending on border law enforcement to $1 billion in the next cycle.

The outlook isn’t as bad as it was in 2011. That year, faced with a more than $20 billion shortfall caused by a severe recession, lawmakers cut spending sharply. Most notably, they whacked more than $5 billion for public schools for the first time in decades. They also tapped into savings and used accounting tricks, even while resisting tax increases.

The 2017 forecast is nowhere near as dire. The state should have more than $10 billion parked in the rainy day fund, though most GOP lawmakers are reluctant to use much of it.

Comptroller Glenn Hegar’s projection that lawmakers would have $4.1 billion in state general funds left over is increasingly seen as too optimistic, as even he admits.

“As I’ve been saying, collections for [the current year] have been trending below our estimates,” he said Wednesday. “However, the current [two-year] budget continues to work. Unlike other energy states, Texas doesn’t need to make cuts to the current budget and will finish with a substantial positive balance this fiscal year.”

Comptroller Glenn Hegar waved to the crowd during the 2016 Texas Republican Convention at the Kay Bailey Hutchison Convention Center in Dallas in May.

(Vernon Bryant/Staff photographer)

In May, many lawmakers sighed with relief as the state finally won a school finance lawsuit. The Texas Supreme Court unanimously ruled that the current funding system, while deeply flawed, is legal. Although there will be agitating for more money for schools, the court’s decision is widely seen as letting the Legislature off the hook.

Some lawmakers, though, are clamoring for significant new spending to dampen sky-high turnover among Child Protective Services caseworkers and improve a long-term foster care system that a federal judge has ruled is “broken,” endangering 12,000 young people already reeling from loved ones’ abuse and neglect.

Other lawmakers are pushing bigger budgets for mental health services. Still others want to fix dilapidated state buildings and patch holes in public employee pensions.

Lt. Gov. Dan Patrick has said he wants to add $345 million to state universities’ budgets so they can replace “set-asides,” or assistance for needy students drawn from all students’ tuition payments. Burgeoning health care and pension costs for tens of thousands of employees at state agencies and universities are always a challenge.

Medicaid, the health program for poor children, low-income pregnant women and disabled and elderly Texans, will need the extra state funds in an emergency or “supplemental” appropriations bill that lawmakers will pass along with the next two-year budget.

Caseload growth, health care inflation and increased use of medical services contributed about equally to the bigger-than-expected rise in the cost of the program, said a Health and Human Services Commission official.

Craymer, with the business-backed tax research group, said that even if adopted, the 4 percent cuts would save at most $1.5 billion.

“Recognize that they exempted more than half of the Texas budget” from the trims, Craymer said.

But some of the cuts would be felt. Even though the prison system has many vacancies now, it would have to eliminate 1,200 prison guard positions. That would add to overtime, probably increasing attrition.

At the Higher Education Coordinating Board, no new money for TEXAS Grants would mean that the percentage of needy high school students who get the state’s main financial aid award would shrink by one-third by 2019.

Senate Finance Committee Chairwoman Jane Nelson, R-Flower Mound

(Courtesy photo)

Even if lawmakers embrace all of the agencies’ suggested trims, that would go only one-fourth of the way to bridging a “$9 billion turnaround from two years ago” that budget writers will face next year, Craymer said.

He was referring to the current cycle’s projected surplus of $4.1 billion, compared with $8.3 billion that lawmakers enjoyed going into last year’s session.

Also last November, voters approved a constitutional amendment that will move $5 billion from general sales tax money into roads in 2018-19. The smaller surplus and the shift of money to roads will shrink available funds for budget writers by $9 billion, he said. And the number would grow if Hegar’s revenue certification estimate from October proves rosy, Craymer said.

He said lawmakers will have to consider spending cuts, use of rainy-day dollars, accounting gimmicks and even fee increases to cobble together the next budget.

Sen. Jane Nelson, the Senate’s lead budget writer, said the 2017 outlook is just taking shape.

"We are preparing for a tight budget next session, but I am confident we will meet our needs,” Nelson, a Flower Mound Republican, said in a written statement.

“Our agencies are on the front lines in the best position to help us identify savings,” she said. “The 4 percent reductions are one tool to accomplish that, but this is the first step of a long process to put together a responsible budget."